Glimmers of hope for Nigerian and South African deals in 2018 and beyond

Following a difficult 2017, the international deal-making climate should improve in South Africa and Nigeria in 2018, according to international law firm Baker McKenzie.

As a difficult 2017 for those looking to make deals in Africa draws to a close, investors looking to forecasts for the next year, will be encouraged by a recent report published by international law firm Baker McKenzie, which points to a brighter future for two of the continent’s biggest economies, South Africa and Nigeria.

As fellow international law firm Hogan Lovellshighlighted at an event earlier this month, 2017 has been a slow year for deals across Africa as a whole, with deal volumes significantly down for the first half of the year, at their lowest since 2009, thanks to a shortage of assets and greater caution from both buyers and sellers, although the firm still found an appetite for deals should circumstances change.

Baker McKenzie’s Global Transactions Forecast, produced in collaboration with Oxford Economics, has predicted an increase in deal-making in Nigeria in both 2018 and 2019, in line with expected global deal activity during 2018; the country having been hampered by uncertainty over policy and politics, leading to a decrease in mergers and acquisitions during 2017.

The slowdown in Nigeria was due to policy and economic uncertainty, said Baker McKenzie’s head of Africa for the Johannesburg office, Wildu du Plessis, particularly relating to foreign exchange, government budgets and oil production issues: “As these conditions ease in the final months of 2017 and into 2018, a rebound in M&A to around USD 4 billion in both 2018 and 2019 is forecasted.”

The firm expects that in the final analysis, Nigerian M&A deals are expected to be USD 716.4 million in 2017 from 28 deals, down from USD 1.2 billion from 28 deals in 2016. However, it expects this to rise again to USD 3.98 billion in both 2018 and 2019, from 35 and 40 deals, respectively.

Optimism for South Africa is more guarded, as the country’s short-term political and economic prospects are more unclear. Jacob Zuma’s government has been beset by internal political wrangling which has damaged its credit rating, while the country’s overhaul of its dispute resolution landscape has also been greeted with caution. The report found that while the opportunity for improvement is there, it is dependent on the resolution of these factors.

Despite the uncertainty, Baker McKenzie believes there will be an improvement in 2018 due to “monetary policy easing and stronger commodity prices”, but still less than a third of the level in 2015, with only USD 9 billion.

Du Plessis said: “For South Africa, there is no guarantee that the predicted upswing will come to pass. There is just too much political uncertainty. If the ANC National Conference in December does not deliver the solution that markets are hoping for, then deal flow and IPO activity will be affected and depressed. If on the other hand there is some hope of a change to the political situation, things may well indeed change for the better.”

The firm’s managing partner in Johannesburg, Morne van der Merwe, said: “Current conditions in South Africa have slowed M&A growth in that international investors are reluctant to invest in South Africa due to the political and economic uncertainty. This uncertainty has caused a reduction in foreign direct investment, which, in turn, hindered deal-making.” The cost of raising capital has also become more expensive, he said.

South African M&A this year is expected to be worth only USD 4.5 billion, compared to USD 10.7 billion from 115 deals in 2016, but a rebound to USD 8.5 billion and USD 9.2 billion from 273 and 295 in 2018 and 2019.

However, the country’s relatively poor performance could turn to its advantage, he continued: “A number of commentators believe that the rand is currently undervalued. This provides entities with greater appetite for risk with opportunities to acquire South African assets cheaply,” although locals will be less inclined to sell them

Meanwhile, the needs of Black Economic Empowerment ownership targets, which have in the past been seen as a hindrance to doing business, are actually “stimulating the deal-making environment”, he added, while the mining sector also offers value to investors.

The increased optimism for both countries chimes with what the firm sees as wider international trends, said Paul Rawlinson, the firm’s global chair: “After a few soft patches in 2017 we have a more optimistic outlook for the global economy and deal making in 2018, as long as the brakes are not put any further on global free trade.”

“We see an uplift in both M&A and IPO activity as deal-makers and investors gain greater confidence in the business prospects of acquisition targets and newly listed businesses. However, it's not a done deal, with the threat of a hard Brexit and a North America Free Trade Agreement collapse both still very real. Business will need to continue to make the case for liberal trade and investment frameworks,” he concluded.

The content of this website is for general information purposes only and does not purport to provide comprehensive full legal or other advice. Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained herein. This material is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified professional when dealing with specific situations.
Please see our terms and conditions page for further details.